Commentary: Rising Imports Won't Sink Japan

By Brian Bremner

With its anemic growth, crumbling domestic companies, and mountain of bank debt, Japan has been the sad joke of the global economy for years. But not in one regard. Year after year during its decade-long slide, the country has run up a huge current-account surplus. That's a measure of all the money a country brings in from abroad through trade, service, and investment flows. A quarter century of exporting Toyotas (TM ) and Sony (SNE ) gadgets has brought Tokyo a surplus of roughly $1.6 trillion--a source of national pride.

But what if Japan's export machine falters? These days, the nation's press is full of dire predictions that Japan--gasp!--may turn into a net importer of goods and services and become dependent on foreign capital to pay for the foreign wares it increasingly covets. In other words, it'll become just like that other global debt-head, the U.S.

SEISMIC SHIFT. It's easy to see why the Japanese are obsessing over these dry trade figures. Data released July 12 show that the surplus for May fell a staggering 46% from a year ago. Despite the yen's 12% depreciation against the dollar over the past year, Japanese exports are down 15% to the U.S. through May. Meanwhile, even though Morgan Stanley & Co. forecasts that the overall economy will contract 0.8% in 2001, import volumes will clock nearly 5% growth. The fear is that if Japan has to borrow abroad to pay for imports, rates will rise so much they will smother the weak economy.

Scary scenario. But the Japanese should calm down. The data do indeed show a seismic shift in the economy. The decline in the surplus, however, may actually indicate that Japanese companies are finally getting serious about adopting global business practices. The surge in Japan's imports stems largely from a shift to overseas manufacturing. The bulk of them are items like high-powered lenses destined for Canon digital cameras and liquid crystal displays for NEC mobile phones.

Japan's manufacturers are going offshore to flee an expensive labor force. A personal computer that costs $1,800 to make in Japan costs only $1,140 to contract out in Taiwan and reship back to Tokyo for sale. That's why top computer makers such as Fujitsu Ltd. and Toshiba Corp. have announced plans to triple their outsourcing work in the next several years, from the current 10% of production to 30%. Thus, economists project Japan's current-account surplus will be sliced in half, to $54 billion, by yearend, compared with 2000 (table). And the forces pushing the surplus down will assert their influence even after Japan's economy recovers.

There's nothing intrinsically wrong with this development. Japanese companies need to outsource to stay competitive. Companies should focus the efforts of their well-paid, well-trained Japanese workers on making more complex products like high-end liquid crystal display panels and digital TVs, while other workers should enter the service economy. This shift occurred in the U.S. and, by and large, produced a healthier economy. Japan should let China, already home to one-fifth of Japanese consumer-electronics parts and component plants, handle the job of producing cheap goods.

AGING POPULATION. On top of that, since stepped-up deregulation in Japan has encouraged a flood of imports, consumers now spend 2% less of their income on clothing and food than they did last decade. Shoppers can buy $15 dress shirts imported from China instead of $50 shirts made locally. Besides, as seniors living on fixed incomes proliferate in Japan, they will need cheaper goods and services to prevent living standards from falling.

But what about the fear that the surpluses will turn into deficits---and that the need for foreign capital to finance the trade deficit will send Japan's long-term bond yields soaring? This prospect is largely a fiction. That's because Japan has its own, almost bottomless source of capital overseas: the earnings from thousands of Japanese plants abroad as well as the payout from huge investment in U.S. Treasuries and European bonds. Instead of worrying about its surplus, Japan should turn its vast talents to rebuilding the rest of its creaking economy.

Bremner covers Japanese finance from Tokyo.

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